World Nuclear Association Blog

The European Commission is investigating whether the UK
Government's proposals to support the construction of the Hinkley
Point C nuclear power plant is legitimate under European Union
competition rules. Plenty of people think that EDF, the company
standing behind the nuclear station, will be receiving a pretty
generous subsidy to the detriment of alternatives. The Guardian
newspaper (3 March 2014) quoted the chair of the UK and Ireland
association of Nuclear Free Local Authorities, Councillor Mark
Hackett, as saying that the project is "the most expensive" power
plant in history and "could choke off the nascent renewable energy
revolution in the UK [and] turning off investors in offshore wind
and solar at a time when such industries are rapidly taking off
elsewhere in Europe". Another critic, Peter Atherton of Liberium
Capital, a London-based broker and corporate finance advisor,
asserted in The Spectator magazine (22 February 2014) that the
government "has agreed to buy electricity at twice the current
market price … which looks like financial insanity".

This is also one of the possible concerns that the European
Commission is examining. In a letter to the UK Government on 18
December 2013 the Competition Commissioner Joaquín Almunia
indicated that it was not clear whether the Hinkley Point C project
would "crowd out" other low-carbon technologies, such as biomass,
hinder the import of electricity from the rest of Europe, and
reduce the incentive to improve energy efficiency.

The Commission's careful language, however, indicates that not
all is what it appears. Firstly there is nothing in the UK
Electricity Market Reform package that disadvantages renewable
energy sources. Renewables are offered the same help as nuclear
power: they are eligible for an infrastructure investment guarantee
from the government and a Contract for Difference arrangement to
help them finance their projects, whether it is the biomass
conversion of the Drax coal-fired thermal power plant or for an
off-shore wind turbine. The government published indicative 'strike
prices' for renewable technologies in the range of £95 to £305 per
megawatt hour in December 2013:
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It has also agreed a strike price for Hinkley Point C of
£92.50/MWh, below that available to any of the low-carbon
alternatives.

Secondly, many people fail to appreciate that the strike price
in a Contract for Difference (CfD) is not a guaranteed price for
the electricity. A CfD is a bet between the generator (the punter)
and its counterparty (a special government-sponsored enterprise) on
the outcome of the competition to sell into the electricity market.
If the outcome is a power price (the 'reference price') higher than
the bet (the 'strike price') then the generator compensates the
counterparty; if the power price turns out to be lower than the
'strike price', then the counterparty compensates the generator.
This bet is linked to the sale of the electricity by the power
generator. If Hinkley Point C fails to sell its power to the grid
then it receives no revenue and no compensation (or penalty) from
the CfD. Like any other generating plant Hinkley Point C will have
to compete in an open market to sell its power. On a windy day it
might not be able to beat the price offered by a wind turbine array
in the Bristol Channel. In fact, and thirdly, the wind array has an
additional advantage since renewable energy sources have priority
access to the grid. If anything, the playing field is stacked
against nuclear power in favour of renewable energy sources and
there is no reason to suppose that competition between generators
within the UK or abroad will be distorted as a result of the proposed strike price.

De-carbonizing the electricity system is not a cheap option but
without a slice of nuclear power for the around-the-clock base-load
generation the transition will be more expensive than it needs to
be. If the government did not support alternatives to fossil fuels
then greenhouse gas emissions would continue to grow, as the German electricity market demonstrates. The UK has a
deregulated and unbundled energy market and the contract for
difference is a way of persuading generating companies to invest in
low-carbon technologies which otherwise would not make business
sense while preserving competition between electricity suppliers.